Friday, May 4, 2012

Like bankers everywhere else, Chinese bankers find way around regulations

Reuters reports that Chinese banks are providing local government bonds 'liquidity support' to get around a ban on guaranteeing these bonds.

This simply confirms that Chinese bankers are like bankers everywhere else.  They will create a financial innovation to get around any regulation that interferes with their ability to make money.

One of the reasons that your humble blogger has pushed for requiring banks to provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposure details is it captures the exposure regardless of how the bankers package it.

Chinese banks are providing de facto guarantees to bonds issued by local government financing platforms, official media reported on Friday, raising new concerns about the risk of local government debt threatening the health of China's banking system. 
Direct guarantees of corporate bonds by commercial banks was once common practice, but was banned from 2008 in an effort to avoid excessive concentration of risk in the banking system. 
Recently, however, fundraising prospectuses for bond issuances by city investment companies frequently boast of so-called "liquidity support" from commercial banks, the official Shanghai Securities News reported. 
Such support is effectively a guarantee by a different name designed to circumvent the ban, the paper quoted industry sources as saying, enabling local governments to pay lower interest rates on the debt.... 
Concerns have risen since 2010, however, that such investments may fail to yield the cash flows necessary to service the debt, leading to a potential rise in bad loans that could threaten the health of the banking system.

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